Barack Obama and the economy

Growth and inequality

THE Wall Street Journal is deeply unhappy with Barack Obama’s recent speech on the economy at Knox College in Galesburg, Illinois. The rising inequality in Americans’ incomes that Mr Obama bemoaned last week, the Journalclaims, is a direct result of his administration’s policies:

For four and a half years, Mr. Obama has focused his policies on reducing inequality rather than increasing growth. The predictable result has been more inequality and less growth. As even Mr. Obama conceded in his speech, the rich have done well in the last few years thanks to a rising stock market, but the middle class and poor have not. The President called his speech "A Better Bargain for the Middle Class," but no President has done worse by the middle class in modern times.

The Journal is right that the middle class has seen little benefit from the modest recovery, and it reports correctly that median incomes today are “5%...lower than the...median in June 2009 when the recession officially ended”. But is it true that “Obamanomics” is to blame for the plight of the middle class? In the interview Mr Obama gave to the New York Times on July 24th, the president trumpeted the fact that “the economy is far stronger now than it was four and a half years ago” and cited long-term fallout from the financial crisis and obstructionism in Congress as the real culprits keeping the middle class down. “Congress moves at such a glacial pace these days”, he sighed.

In response, the Journal screams hypocrisy, arguing that Mr Obama cannot claim credit for boosting the economy while he at the same time insists that economic troubles inherited from the Bush years have precluded more robust growth. There may indeed be some slippery reasoning here, but Mr Obama’s assessment paints about the right picture of the power of a president to control the economy. A year ago, my colleague at the Free Exchange blog captured the constraints facing Mr Obama:

The real rub for Mr Obama is...that there is only so much any president can do to combat business cycle fluctuations. Congress is always a bear to work with, and the real authority over the demand side of the macroeconomy rests with the Federal Reserve.

Twelve months down the road, Mr Obama has won re-election and is narrowing down his list for the next Fed chair to a few candidates, but the constraints he faces as a steward of the American economy are unchanged. A pair of disingenuous arguments fuel the Journal’s claim that Mr Obama’s policies have put a brake on the recovery. Here is the first:

The food stamp and disability rolls have exploded, which reduces inequality but also reduces the incentive to work and rise on the economic ladder.

The Onion has exposed the oddity of this proposition as well as anyone, and recent research into the relationship between the Supplemental Nutrition Assistance Programme (SNAP) and work incentives belies the Journal’s claim. It stands to reason that a few hundred dollars in food stamps for you and your family every month would not turn you into a beach bum or deter you from searching for a job. (There are other bills to pay, after all.) I suppose some people might descend into lethargy if their daily bowl of Cheerios were covered by a federal programme, but according to a recent study, this rarely happens:

The overwhelming majority of SNAP recipients who can work do so. Among SNAP households with at least one working-age, non-disabled adult, more than half work while receiving SNAP — and more than 80 percent work in the year prior to or the year after receiving SNAP. The rates are even higher for families with children — more than 60 percent work while receiving SNAP, and almost 90 percent work in the prior or subsequent year.

More to the point, in the mid-2000s about 96% of people who worked before receiving food stamps continued to work after entering the programme. So helping people put food on the table does not seem to contribute to unemployment and does not, according to available evidence, hamper economic growth.

The Journal’ssecond warrant for the claim that Mr Obama's policies are anti-growth is equally weak:

Mr. Obama's record tax increases have grabbed a bigger chunk of affluent incomes, but they created uncertainty for business throughout 2012 and have dampened growth so far this year.

This bald assertion makes little sense. Uncertainty may have plagued the business community in the run-up to the fiscal cliff, but since the year-ending deal to very modestly increase tax rates on the highest earners, there have been no real surprises. Demand is historically immune to tax-rate changes like these, as the Economic Policy Institute observed in a recent paper:

As the economic literature widely finds no discernible effect of top tax rate changes on the primary factors driving economic growth, it is somewhat reassuring that a deep body of research, such as that by Gravelle and Marples (2011) and Hungerford (2012), finds changes in the top U.S. marginal tax rates have had no statistically significant impact on real GDP growth itself.

There is, however, an upside to the tax increases:

Time series regression analyses of top marginal tax changes’ impact on economic growth (as well as on related factors of growth), the ETI literature, and analyses by nonpartisan budget scorekeepers overwhelmingly suggest that increases in top marginal tax rates should have a negligible impact on economic growth, and that there is substantial scope for raising more revenue. Economic research also suggests that such increases would decrease after-tax income inequality (by definition making the tax and transfer system more progressive) and could also have powerful effects on pre-tax inequality.

The bottom line? The higher top marginal tax rates that went into effect this year are not holding down economic growth but do represent a small step toward shrinking income inequality and ameliorating the deficit. Still, as Mr Obama emphasised in his speech last week, the middle class continues to fall behind even as the stockmarket surges and the housing market picks up, and there is no apparent quick fix for what seems to be a worsening trend over at least the past decade. The president promises to provide detailed proposals for a long-term solution in the coming weeks, and his ideas should be scrutinised carefully. But dismissive, fact-blind critiques of Mr Obama as an “inequality president” are no help at all.

Once upon a time, the WSJ was an excellent source of news and hard data about business and the economy. Under its new management, it appears more focused on pushing their ideology than minor details like factual accuracy. Sad to see a great institution brought so low.

There's a lot to disagree with in this post, although not particularly the conclusion.

Regarding the Free Exchange quote, R.A. has been making the case since around 2008 that the fed can manage demand better than congress. I don't think R.A. has convinced anyone who didn't agree the first time. Among the unconvinced, I'd include Buttonwood (and myself.) It's not impossible, but if the objection to the WSJ is that they are failing to support or question themselves empirically, the same objection should be made to claims that monetary policy matters more than federal action.

I also think the blogger makes the wrong accurate objection to the WSJ's argument that Obama cannot simultaneously take credit for the improvement in the economy while blaming earlier events for the weakness. I think the right correct assessment is that we can't borrow our way out of debt. For robust growth, we need to deleverage and slowly replace lost value with newly generated value. That means that Obama is not entirely responsible for the recovery, either its weakness or its existence but also that any plans he might now have for strengthening the economy should be greeted skeptically. What the government can do to strengthen demand is to borrow more and that will be counter-productive.

Finally, the "uncertainty" argument is maddening both when it is made and when it is opposed. The argument that Republicans make is plain stupid, basically that Obama has been so interventionist that people are afraid to invest in the face of radical plans as yet hidden. It makes sense internally but is completely counterfactual. Obama is guilty of lassitude rather than radicalism and what Romney (according to Lexington this week) planned was a lot more radical and a lot more likely to create uncertainty. The truth is, there is growth in the economy, no radical policy shifts and the reason to invest is to grab a share of that growth, secured by lassitude.

But on the other hand, Obama's (and congress') inability or passivity to do anything significant about any of the obvious and emerging problems, the lack of tax reform, the lack of carbon pricing, the lack of deregulation, the absence of pension reform and the discouragement of savings- does create uncertainty.

Any CEO not investing because he or she fears the imminent government takeover of labor and commodities should be fired by their directors as unfit to make such important decisions. But the failure to address the imbalances in the economy should be making us all a little more cautious than we would need to be if we knew where the kinks lie in our fiscal futures and how significant they will be.

"The core problem has been Mr. Obama's focus on spreading the wealth rather than creating it. ObamaCare will soon hook more Americans on government subsidies, but its mandates and taxes have hurt job creation, especially at small businesses. Mr. Obama's record tax increases have grabbed a bigger chunk of affluent incomes, but they created uncertainty for business throughout 2012 and have dampened growth so far this year."

The Economist's response completely leaves out Obamacare and just talks about marginal tax rates which aren't mentioned by the WSJ.

The short answer is that the GOP's insistence that markets and market players optimally self-adjust, and that markets are efficient, led to under-oversight by US agencies, and a lot of bad decisions made by the financial industry, ultimately tanking the US and world economy.
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The GOP then obstructed any effort to improve the economy and oversight, not willing to give Obama a political victory, and continue to blame Obama for the slow recovery.
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Ultimately, the GOP is responsible for both the tanked economy and the slow recovery, and their low approval rating shows it.
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In short, regarding economic policy the GOP has been a disaster, and has no credibility.

The Wall Street journal isn't a credible editorial source anymore. When members of their editorial board call a bike sharing scheme funded by ads communism and talk of a fascist bike lobby you know it has lost its way.

"We did not have The Depression until after the Fed started operations."

You may be unaware that depressions were a regular part of 19th century (and earlier) economic life. Indeed it is not so long ago that economic history references to "the Great Depression" referred to 1870 rather than 1929.

Presumably, if you believe the government cannot improve the economy you believe it cannot make it worse either. Or doesn't logic work like that for you?

The only purpose of sticking it in the farm bill was to get farm state Republicans on board. Sadly, farm subsidies are much more popular in Congress than SNAP. Now, I wouldn't have a problem with separating them if it means killing farm subsidies and keeping SNAP funding, if not the exact program itself. But it turns out the House is trying to do the exact opposite.

"This is egregious whatever you think of the food stamp program, and it’s indicative of why the endless, often-esoteric debates about the Republican future actually matter to our politics. Practically any conception of the common good, libertarian or communitarian or anywhere in between, would produce better policy than a factionally-driven approach of further subsidizing the rich while cutting programs for the poor. The compassionate-conservative G.O.P. of George W. Bush combined various forms of corporate welfare with expanded spending on social programs, which was obviously deeply problematic in various ways … but not as absurd and self-dealing as only doing welfare for the rich."

I admit to a fondness for the concept of "make-work government jobs" as a condition for welfare. The challenge is to come up with jobs which are, if not actively useful, at least not harmful. I have my doubts about what we are likely to come up with -- while admitting that the CCC during the Great Depression managed to do a fair amount of good for our infrastructure, so perhaps we could pull it off again.

I'd rather see people fail at dismantling than succeed at sabotage.
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Pity so much of the House disagrees with you on that. They are, as far as I can tell, purely delighted to engage in sabotage anywhere and everywhere. Which is why I will be totally unsurprised if they end up shutting down the government before the year is out. It's not just that they dislike some (lots of) Federal programs. It's that they dislike the entire Federal government (DoD excepted), and would see no downside to having it shut down. Until, I suppose, their constituents (meaning, as they seem to, only those both in their districts and voting for them, not everyone in their district) discover that they are among those hurt by it.

I agree about Glass-Steagall and Harriet Miers and Bush. But I think it was or was nearly policy that you appointed people to regulatory bodies who didn't believe in the mission. To me that is a different and worse alternative to either deregulation or to appointing people who believe as you do, that the mission is important but that importance demands a light touch. I don't think Bush' SEC appointments were incompetent, I think they thought they were there to gum up the works. It was part of a theme with John Bolton at the UN, for example.

I'm all in favor of people with pro-business theories regulating business. I'm in favor of people who want a level-playing field enforcing civil rights. But I think constructive engagement is better than passive resistance for people with government jobs. I'd rather see people fail at dismantling than succeed at sabotage.

According to one of my econ professors, during the time when Glass-Steagall was in effect and its repeal was under development but not obviously going to happen, none of the 10 largest financial firms in the world were American. It isn't immediately falsifiable that this was a bad thing so I agree with you.

But I also agree with D18 in this way- having regulations you don't enforce is probably worse than either over-regulation or under-regulation and that was the Bush administration's approach. Talk about uncertainty.

A lot of infrastructure is a lot more technical than it once was. On the other hand, everybody under 30 is comfortable working with computers to a degree that is almost impossible for most people over 60 to imagine. So, civil engineering degree or no, they could do more of the work than you expect.
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Not the design, no. But the construction? I think so. Constructing and maintaining) subways, highways, flood control dams, etc. -- an awful lot of what gets done by people using machinery and automation is no more difficult to deal with than a lot of video games.

Left, right, center, Democrat, Republican, independent, I think we can all agree that you're being partisan and lack credibility.
."The Gramm-Leach-Bliley Act makes the most important legislative changes to the structure of the U.S. financial system since the 1930s. Financial services firms will be authorized to conduct a wide range of financial activities, allowing them freedom to innovate in the new economy. The Act repeals provisions of the Glass-Steagall Act that, since the Great Depression, have restricted affiliations between banks and securities firms. It also amends the Bank Holding Company Act to remove restrictions on affiliations between banks and insurance companies. It grants banks significant new authority to conduct most newly authorized activities through financial subsidiaries. Removal of barriers to competition will enhance the stability of our financial services system. Financial services firms will be able to diversify their product offerings and thus their sources of revenue. They will also be better equipped to compete in global financial markets."
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- Bill Clinton
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I await your ad hominem response.

But to those people, the root cause is the lack of bandages. They believe the natural state is to be bandaged all over and that the game is rigged when a bandage is removed. In the beginning there was socialism and there was no death or suffering. Then the elephant tempted humanity to eat from the tree of Norquist.

I wonder if we could spend some of the workfare money on studying what went wrong with the up-bringing of the folks who would rather do nothing than work. I mean, if you would rather just sit on the couch watching daytime television than even work on a hobby, something went wrong at an early age. After all, small children don't seem to have a problem finding an interest in working at stuff. (Not always explicible to adults stuff, but that's beside the point.) So, how did these folks lose it, and what could we do to help them not lose it?